Posted by Adam Lindheim
By John Tozzi
As the effects of the recession continue, the high number of business bankruptcies—7,514 in May, up 40% from the prior year—shows few signs of abating. That's because the factors pushing companies into bankruptcy, including depressed sales and tighter credit, may linger even when the economy starts growing again, especially if the recovery is less than robust.
More than 100,000 companies—about one in every 270 American businesses—have landed in bankruptcy court since the downturn began 18 months ago, according to data compiled by Oklahoma City-based Jupiter eSources, which tracks bankruptcy filings through its AACER database. The rate of commercial bankruptcies has more than doubled in two years, and economists expect the level to remain high for a year or longer once the recession ends. In addition, creditors are less willing to work with business owners to find ways for an insolvent firm to recover.
That's because in a sluggish recovery, banks with already fragile balance sheets are unlikely to be sympathetic to debtors' turnaround plans. Often creditors recover more of their debts faster by closing bankrupt businesses and selling off the assets. "Today lenders—meaning banks—have much less patience for a traditional Chapter 11 reorganization, no matter what size the case," says attorney Kenneth Rosen, head of the bankruptcy group at Lowenstein Sandler in Roseland, N.J.
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